The Clash of the Titans

Yesterday evening I attended the ERC's Annual ‘Clash of the Titans' debate, where three economists – from Cambridge, Oxford and the LSE – presented their outlook for the economy in the year ahead.

The evening started off with Kevin Daly, in the light blue corner, representing Cambridge.

Kevin argued that the conditions that had led to an improvement in the UK economy over the course of 2013 would support growth in 2014 too. He said that these were:

Improvements in credit conditions driven by FLS

The depreciation of Sterling (relative to pre-crisis levels) was an advantage for UK exports - though he noted the recent appreciation was a concern

Reduction in economic uncertainty, which should lead to an increase in household spending and business investment in the year ahead

In contrast, Daly did not think fiscal policy had a major role to play, for example he argued the Help to Buy scheme had come in too recently to have any major economic impact yet.

Overall his expectations for the UK economy were positive, but he expects some moderation in growth compared with current levels.

In the dark blue corner, representing Oxford, we had Stephen King, who described his position as similar to Daly's though a little more “glass half empty”.

King thought that recent forecasts suggesting that the UK could top the league tables for economic growth next year might turn out to be true, he argued that this was no indication of the long-term health of the economy.

He expressed three related concerns:

That the UK Balance of Payments was unimproved (despite the aforementioned recession-related depreciation in Sterling)

A lack of productivity growth

A lack of export and investment growth

Essentially, he said, the recovery we had hoped for hasn't happened, and better balanced growth has not materialised.

Finally, representing the LSE, we had Ros Altman, who took what she described as an unashamedly positive view of the UK economy.

Altman based her view on the recent exceptionally positive leading indicators for the UK, notably the PMI. She also pointed to large corporate cash balances and positive US surveys as reasons to be cheerful about the UK's economic prospects.

In addition she argued the government was playing a role in growth, noting that OBR forecasts showed government investment would add to growth in 2014. She also noted that Help to Buy was likely to fuel strong growth in construction in the year ahead.

Her biggest concern was the low level of interest rates, which she felt disincentivises saving, and promotes unsustainable borrowing. In summary she said 2014 would be a very good year for the economy, but not great news for savers.

That was a summary of the evening's presentations, but in the spirit of debate, here are some of my points too:

Concerns about rebalancing towards investment and exports are justified, though there are reasons to be more positive in 2014

However, our survey shows that investment intentions are a six-year high, and we do expect to see an improvement in business investment next year;

Yesterday's trade data suggests that the UK has some way to go towards seeing growth from net trade, indeed the OBR's forecasts expect trade to drag on growth this year, and not contribute next year;

However, the UK is doing well in reaching out to emerging markets. Manufactured exports to BRIC economies rose 6.2% in the year to September.

...Help to Buy is helping...

Although Daly didn't think Help to Buy was having much of an impact yet, we have heard wide-ranging anecdotal evidence from manufacturers that it has boosted confidence in the construction sector and led to increased demand for sectors such as non-metallic minerals and rubber and plastics.

...And there may also be sources of growth that weren't mentioned

As one audience member noted, the discussion didn't mention technology as a source of growth. In our Innovation Monitor earlier this year we found that for many manufacturers the development of new products and services would be a key driver of growth in the year ahead.